By Anusha Shrivastava Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Fund manager Wilmer Stith recalls a discussion with his analysts in mid-September about the worst credit landscape he had seen in more than three decades.
Lehman Brothers Holdings Inc. was gone. A money market fund that held Lehman assets declared the net asset value of its shares had fallen below the hallowed $1 per share level. Investors were wary of any type of debt except for bonds sold by the safest governments.
Some of the largest U.S. corporations were unable to raise short-term loans used to fund regular expenses such as payroll or rent. These IOUs, known as commercial paper, were only available at higher rates. With economic activity screeching to a halt, companies of all sizes faced the risk of shutting down operations altogether.
"The entire system looked frozen at different levels," said Stith, who manages $3 billion in fixed-income assets for MTB Investment Advisors in Baltimore, Md. "We sat back and took risk off the table."
Instead of buying $10 million of commercial paper a day, Stith's fund slashed its buying to barely $3 million.
Like Stith, risk-averse investors across the board abandoned the commercial paper market this year, effectively resulting in a buyer's strike.
Lending to companies for short periods of time is widely considered one of the safest investment strategies. The low risk also means small margins, but money market and mutual funds that dominate the market make up for it in bulk by making billions available for loans.
Bruised by disruptions across all markets, available funds for companies in the commercial paper area shrank to nearly half by the end of September from its peak of $2.2 trillion in July 2007. September's decline alone totaled $153.5 billion, according to data from the Federal Reserve.
"There was an unprecedented market implosion," said John Atkins, a fixed-income analyst at IDEAGlobal.com in New York. "It was a wholesale collapse of the commercial paper market that was reversed when the Fed set up its program."
Facing the breakdown of a major lifeline for companies of all sizes that could accelerate the plunge in economic activity, the Federal Reserve announced the creation in early October of a backstop facility to buy three-month debt directly from highly rated companies through April 2009.
The facility helped shore up confidence in the market and provided some stability at least until the first quarter of next year.
"The market today is in good shape," said Charlie Morrison, senior vice president and group leader of the money market group for Fidelity Management & Research Co., the largest mutual fund company in the country, noting the Fed's program boosted their interest in buying debt that matured past three months.
More Healing Needed Still, lower-rated companies that are not eligible for the Fed's program are in a bind as they are forced to offer investors high rates, or sell assets to stay afloat during a recession. Such companies form about 5% of the $1.6 trillion market.
Today, "the commercial paper market is not frozen like it was, but it is not yet completely healthy," Stith said. "The economic realities are set to get worse and, while the credit portion is improving, the next phase includes macroeconomic deterioration."
That means some companies that are seeking funds for the most basic expenses can expect to deal with an increasingly difficult environment. The economy is now officially in recession and investors remain risk averse. Commercial and industrial companies are clamoring for more federal action to unlock credit markets, saying that moves to prop up the banking sector haven't done enough to jump-start lending to businesses.
Kevin Giddis, head of fixed income at Morgan Keegan, a broker dealer in Memphis, Tenn., said his firm has pared the list of companies whose debt it holds to about 15 from 60 this past summer. A year ago, that list had 100 names.
"History shows that once confidence is shattered, it takes time to recover," said Sung Won Sohn, economics professor at California State University and vice chairman of the board of retailer Forever 21, Inc. "It's not like an auto part that you can change it and fix the vehicle."
-By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371; anusha.shrivastava@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=B8Ivi3kcr48MG8t2c5SWHw%3D%3D. You can use this link on the day this article is published and the following day.
(END) Dow Jones Newswires
December 05, 2008 15:17 ET (20:17 GMT)

Publié le 05 Décembre 2008 Copyright © 2008 Dowjones